An analysis of toughening of magnesia partially stabilized zirconia (Mg-PSZ) due to dilatational transformation is presented in this paper. Transformation toughening of Mg-PSZ is attributed to the stress-induced phase transformation of tetragonal zirconia to monoclinic structure in the neighborhood of a macro-crack tip. A trate (incremental) type constitutive model is developed, using a micromechanics approach, wherein the interaction between a transformed zirconia particle and the rest of the material is considered. Problems of stationary and stably propagating cracks are analyzed, using a finite element method. The results of finite element analysis are compared to those of an experimental study by Perry et al. In the comparisoon, of it is found that the displacement and toughness enhancement during stable crack propagation, predicted by the finite element analysis, are very analogous to those obtained in the experimental study. Moreover, the present constitutive model is capable of revealing detailed information, such as the distribution of transformed zirconia in the wake zone.